Economic Error #21: It Is Possible to Have Civil Government Without Taxes or Debt.

Gary North

Ellen Brown is a utopian. She calls for something chapter 47 of her book is titled "Over the Rainbow: Government Without Taxes or Debt." What is interesting about this chapter is there is not one word about how government can operate without taxes or debt. It is ten pages long, and it is filled with a series of recommendations of monetary reform, but there is nothing in it that discusses how the chapter title can be achieved. Here is how she begins the chapter.

Going over the rainbow suggests a radical visionary shift, a breakthrough into a new way of seeing the world. We have come to the end of the Yellow Brick Road, and only a radical shift in our concepts of money and banking will save us from the cement wall looming ahead. We the people got lost in a labyrinth of debt when we allowed paper money to represent an illusory sum of gold held by private bankers, who multiplied it many times over in the guise of "fractional reserve" lending. The result was a Ponzi scheme that has pumped the global money supply into a gigantic credit bubble. [Web of Debt, p. 451]

The world went off the gold coin standard in August of 1914, with the outbreak of World War I. Only the United States remained on the gold coin standard, meaning a gold coin standard. Britain reestablished a gold coin standard in 1925, but it abandoned the policy in 1931. Franklin Roosevelt made ownership of gold illegal for Americans in 1933, and the government confiscated all of the gold that it could lay its hands on. That was the end of the gold coin standard.

The phony gold standard of the 1944 Bretton Woods agreement, called the gold exchange standard, only restricted central banks. It had nothing to do with commercial banks. Only the United States maintained free convertibility of its money into gold, and that only applied to foreign central banks and foreign governments. That system ended on August 15, 1971.

Ellen Brown speaks of fractional reserve banking as an aspect of the gold standard. This is completely misleading. Her book shows clearly that there was no gold standard after Franklin Roosevelt confiscated the gold.

The fractional reserve banking system was always supported by state governments and the Federal government. At no time did any government legislate a 100% reserve ratio for banks. She also knows this. She is in favor of a 100% reserve ratio, but only with paper money as the foundation of the system. She rejects it with respect to gold. She opposes gold because gold restricts the state.

The abolition of the gold coin standard in 1933 in the United States, and in Europe in 1914, created the Ponzi scheme of bank debt that she so deplores. She is trying to blame the gold standard for the failure of the free market to call a halt to this Ponzi scheme. But this Ponzi scheme is a government scheme, for the government could have called a halt to it at any time by either of two methods.

The first method was recommended by Ludwig von Mises. That method is free banking. The government would require all banks to honor their contracts. He left it up to other banks and to depositors to determine whether or not a bank had extended too much credit in relation to its deposits. Mises's recommended this as he did not trust governments. He did not think the governments of this world whatever restrict the fractional reserve banking process. Governments want cheap loans, and they get them from fractionally reserve banks.

The second method was recommended by Murray Rothbard: a 100% reserve requirement for all banking. The problem for Rothbard was that it was impossible to enforce this in his system, because he did not believe in the legitimacy of any civil government. There would be no enforcer of the 100% reserve ratio. So, in effect, he returned to the policy recommended by Mises.

Both Rothbard and Mises opposed central banking. They opposed it because they understood that central banks exist so as to protect the largest of the private commercial banks. Central banking protects large banks from runs by depositors and by smaller banks. This enables the banking system as a whole to have far more leverage, meaning more fractional reserves, than would be possible if there were no central bank.

Ellen Brown prefers to let Congress control the money supply. If Congress controls the money supply, then there is no restraint on the expansion of money, other than political pressures. But, as we have seen, these political pressures rarely operate to restrict the expansion of unbacked paper money.

The point of the gold coin standard was to put a veto in the hands of the community. Depositors could control the expansion of credit at a bank merely by taking their IOUs from the bank down to the bank and demanding payment in gold coins. The central bank faced the same threat. So, the central bank had to restrict its issuing a credit to the national government.

Ellen Brown would remove this veto from the public. Congress would be autonomous. It would have the power to expand the money supply in order to purchase anything that I wanted to buy. Brown has said this specifically.

Ellen Brown is inflationist, just as all of the Greenbackers before her were inflationists. She comes in the name of a new vision. But this new vision is an old vision. It is the old vision of coin clipping, debasing currency, and paper money. There is nothing new about this vision. Isaiah the prophet challenged the people of Judah: "Thy silver has become dross, thy wine mixed with water "(Isa. 1:22). Debasement was going on in Judah 750 years before the birth of Christ. It is an old practice.

With or without bankers, with or without fractional reserves, with or without banking profits, governments debase the currency. We do not need a visionary system to stop this. All we need is for the government to get out of the money business, and to enforce contracts. That would stop the inflation. But it would also stop the welfare state, and Ellen Brown is a great defender of the welfare state.

Ellen Brown believes in something for nothing. She believes it is possible for governments to be run without taxes or debt. She believes the paper money will achieve this goal. She believes, in the words of Ludwig von Mises, in the principle of stones into bread. She believes that there is no scarcity in this world. Only in a world without scarcity can civil government be run without taxes or debt. No such society has ever existed. There is no theory of civil government that would indicate how such a system could exist. But she says it can exist, if only we follow her visionary plan to let the United States Congress control the money supply irrespective of gold, silver, or interest rates. Just give the power to Congress, and Congress will issue pieces of paper with dead politicians' pictures on them, plus the words "legal tender." That is all it will take to turn stones into bread. That is all it will take to overcome scarcity.